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Sovereign yields and the risk-taking channel of currency appreciation

Listed author(s):
  • Boris Hofmann
  • Ilhyock Shim
  • Hyun Song Shin

Currency appreciation goes hand in hand with easier financial conditions and compressed sovereign bond spreads, even for local currency sovereign bonds. This yield compression comes from a reduction in the credit risk premium. Crucially, the relevant exchange rate involved in yield compression is the bilateral dollar exchange rate, not the trade-weighted exchange rate. Our findings point to a financial risk-taking channel of currency appreciation associated with the global role of the dollar.

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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 538.

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Length: 41 pages
Date of creation: Jan 2016
Handle: RePEc:bis:biswps:538
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